AGC's Initial Analysis of Debt Limit Legislation
After a long battle, Congress is heading home for the next four weeks to spend time in their district offices while meeting with constituents. AGC has gotten many questions about the debt deal which Congress passed this week. People ask, what does it mean for the economy? What will it do to taxes? What will it do to spending? Most importantly, what does it mean for construction? It is still early, and the definitive impact of the legislation on taxes, spending and the economy is not yet fully understood. Below is AGC’s initial impression on what the deal is, what it will do and what we might see over the next year and a half.
Was the debt limit increase needed?
The federal government has an obligation to pay its bills. It should pay its outstanding obligations for domestic, military and international spending. Congress should also account for the impact of tax breaks allowed by the Treasury. The federal government decided how much it was going to spend in fiscal year 2011 when the president signed into law 112-110 the full year appropriations bill for FY 2011. The federal government has ongoing obligations to pay interest on debts, and to pay Social Security, Medicare and similar claims. The federal government processes a significant number of payments each month; for example, 211 million payments were made in June. They need a certain cash flow to cover those payments, similar to a contractor. In August 2011 the federal government has $172 billion in expected revenue and $306 billion in scheduled payments of $306 billion. The $134 billion shortfall requires the debt limit to be raised.
What does the plan do?
The bill establishes a process more than anything else. It creates a process for the release of debt limit increases, for the evaluation of federal spending priorities and for the imposition of across-the-board cuts if Congress fails to agree on priorities and fails to hit designated spending targets. The legislation also calls for Congress to take a vote on a balanced budget amendment to the Constitution.
The plan would initially raise the debt ceiling by $900 billion. It also sets new budget caps that would cut almost $1 trillion from federal discretionary programs and second, it creates a special joint committee to cut another $1.2 trillion to $1.5 trillion from federal programs. The amount of the debt limit increase will ultimately depend on the level of new deficit reduction measures that the Joint Select Committee on Deficit Reduction proposes. The combined $2.1 trillion to $2.4 trillion increase in the debt limit would be enough to get the government through next year’s election without Congress and the president having to raise the debt ceiling again.
The legislation passed this week establishes new budget caps that will reduce federal spending by almost a trillion dollars over the next 10 years by requiring cuts of 4-11% annually over the next decade. These budget caps will apply to annual appropriations bills currently being considered in the House and Senate. The second round of budget cuts will start with the Joint Committee on Deficit Reduction, which will be a 12-member special congressional committee, made up of three Republicans and three Democrats from the House and Senate. The Joint Committee will be appointed in the next two weeks, they have to hire a staff director and have to have their first meeting within 45 days. House and Senate Committees that want to make recommendations to the Joint Committee must do so by October 14. The committee is tasked with writing a bill by November 23 that will, as mentioned above, reduce deficits by another $1.5 trillion over 10 years. The House and Senate would then vote on the plan by December 23 without amending the committee’s recommendations.
If the Joint Committee does not meet their deadlines or their budget cutting targets, an additional $1.2 trillion in spending cuts would automatically go into effect. This process, known as sequestration, would be imposed 15 days after Congress adjourns after failing to meet the targets, and would be equally divided between defense and non-defense programs. Social Security, Medicaid and unemployment insurance programs would be exempted from automatic cuts.
An explanation of the Budget Control Act and the path forward for further deficit reduction is outlined in this flow chart.
What does it mean for spending?
The legislation would establish discretionary spending limits, subject to the sequestration process previously described. The bill would set separate discretionary spending limits for security and non-security spending in FY 2012 and FY 2013. From FY 2014 to FY 2021, discretionary spending limits would apply globally to all discretionary spending. Under the bill, security spending would include discretionary appropriations associated with agency budgets for the Department of Defense, the Department of Homeland Security, the Department of Veterans Affairs, the National Security Administration, the intelligence community management account, and all budget accounts for international affairs.
The bill would also prohibit the House and Senate from considering legislation that would increase spending beyond the discretionary limits in the bill, subject to a point of order. According to the Congressional Budget Office (CBO), if appropriations are equal to the caps on discretionary spending, the bill will reduce budget deficits by $917 billion between 2012 and 2021. In addition, legislation originating with the Joint Select Committee, or the automatic reduction in spending, would reduce deficits by at least $1.2 trillion over the same ten-year period, making the total impact on deficit reduction at least $2.1 trillion from 2012 to2021.
What does it mean for taxes?
The immediate deficit reduction plan does not include or preclude tax increases. The additional deficit reduction could include tax increases, but only if 7 out of 12 members of a new joint committee of Congress agree to raise taxes, including at least one Republican member of the committee; and a majority of the House and Senate vote for the committee’s recommendations; and the president signs the bill into law. Today House Speaker John Boehner (R-OH) said he does not plan to appoint anyone who will support a tax increase and Majority Leader Harry Reid (D-NV) said he does not plan to appoint anyone who will agree to a deficit reduction plan that does not include tax increases, marking the first disagreement of the joint committee before it is even constituted.
Impact on Construction
Construction programs have taken a disproportionate share of cuts in 2011 and are likely to be cut further in 2012. The fiscal 2011 continuing resolution that was passed in April cut total spending by $40 billion, with $22 billion coming from construction accounts. In the House funding for EPA was cut by a total of $1.5 billion for fiscal 2012, and more than $900 million of those cuts came out of wastewater and drinking water state revolving funds.
It is important to note that the caps only impact discretionary budget authority and will be felt in all federal construction programs in this category. Construction programs funded from the Highway Trust Fund and the FAA Airport Improvement Program do not appear to be subject to these caps because these are trust fund programs which are considered a form of mandatory budget authority. This does not in any way guarantee that these programs will escape cuts in 2012. The current level of highway spending can not be sustained by the current highway trust fund revenue.
AGC supported this bill because of the prospect of a financial crisis or an increase in interest rates if Congress failed to act. Higher interest rates would have negative impacts on private construction (still about 60%) of the total construction spending annually. The potential for a debt limit crisis to increase interest rates nationwide would also dampen the demand for construction services. It would also increase the level of economic uncertainty that keeps owners from wanting to invest in new buildings.
AGC will spend August making the case for construction. AGC will meet with the members of the Joint Committee and the standing committees of Congress that may be offering advice to the joint committee before October 14. We will also be working to get the FAA authorization extended and get the highway reauthorization off the ground. We will be offering up ideas to increase efficiency and reduce costs while still delivering the projects the country needs.
For more information, please contact Jeff Shoaf at (202) 547-5013 or firstname.lastname@example.org.
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